Access to long-term capacity for electric interconnections: toward a single European set of rules

1. Access to long-term capacity for electric interconnections: toward a single European set of rules Guro Grøtterud 2nd common RCC CSE-CWE regions28 September 2010 Milan

2. Towards a single set of European rules (1/2) Longer maturity transmission rights are a crucial element for developing competition and the creation of an European electricity market Long-term capacities allow market players to take sustainable position in neighbouring markets and to hedge themselves against price differential volatility The degree of harmonisation between the different allocation rules in force within the European borders is already high The ERGEG Benchmarking report on medium and long-term electricity allocation rules shows that the creation of a single European allocation set of rules is within a reach.

3. Towards a single set of European rules (2/2) But recurrent questions need to be answered: Firmness Maximisation of cross-border capacity PTRs/FTRs Secondary markets Framework Guidelines on Capacity Allocation and Congestion Management should provide guidance to solve those issues.

4. Guaranteeing firmness of cross-border capacity Guaranteeing firmness of cross-border capacity (or curtailment compensation based on the daily market prices) is a key element to the design of the integrated European electricity market: The absence of firmness is a risk for market players that is taken into account when they bid for capacity This risk is even more difficult to handle for market players without generation units on both sides of the interconnection Although the European energy regulators are on the way to reaching a consensus on the target to be met in terms of firmness, there is less consensus on how this target can be reached, which means the two following key questions will have to be duly addressed: How can we improve confidence in the daily price references used to compensate interconnection capacity holders in case of curtailment? How can we incentivize TSOs to allocate a maximum of financially firm capacity, at a lesser cost for network users?

5. In the short-term, in the absence of appropriate incentive mechanisms to maximise capacity, regulators have no other choice but to guarantee TSOs that costs related to firmness of capacity allocated at the different timeframes will be covered If needed, transitory solutions can be implemented by regulators in order to limit the risk borne by network users: By introducing caps on compensation By modifying the distribution of capacities between the different timeframes As they are in charge of guaranteeing the interests of network users, while ensuring the well-functioning of markets, regulators should be more involved in those decisions. Maximizing the amount of cross-border capacities

6. Moving to Financial Transmission Rights On the interconnections where a market-coupling mechanism exists, regulators should ask TSOs to allocate the long-term interconnection capacity in the form of options to receive the price differential (if it is positive) Simplification of the operational processes both for TSOs and market players as the nomination step disappears A majority of long-term interconnection capacities is already used as FTRs on the coupled markets Increase in the traded volume on PXs with, potentially, a positive impact on the liability of price references (used to compensate curtailments!)

7. Developing liquidity on secondary markets The implementation of secondary markets, in particular with the possibility of transferring capacity between players, was a strong demand from market players. The extremely low rate of use of these transfers shows that this demand from the players is not completely satisfied. Several reasons for that: Only partial transfer of responsibility Absence of an anonymous dedicated platform Trade to be done early (until D-3 or D-4) Absence of firmness The development of secondary markets would give TSOs an additional tool for guaranteeing firmness of capacities as well as a better valuation of the capacities On the interconnections where a market-coupling solution is not conceivable in the short term, the implementation of PTRs with a (free) UIOSI mechanism should at least be favoured

8. CRE’s report on the longer maturity transmission rights is downloadable in French and in English:http://www.cre.fr

9. Caps on compensations The simplest and easiest way to introduce firmness A good compromise between the need for firmness and the need to protect end-users against the risk of market failures Caps can be put on price differentials and/or on the budget available for compensating curtailments Such caps have been successfully implemented on the French-Spanish border in June 2009 and will be implemented on the Belgium-French border soon

10. Distribution of capacities between timeframes The distribution of capacities between different timeframes: also an important tool to mitigate risk In the draft version of the Framework Guidelines, TSOs shall submit to NRAs’ review and approval the levels of capacity made available